What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-04 compared with 2020-08-07 · 132 added, 115 removed, 306 unchanged (45% of the section changed)

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We currently have a pipeline of drug candidates focused on immuno-inflammatory diseases, as well as one product approved by the U.S.

Food and Drug Administration, or FDA, that we are not currently distributing, marketing or selling, and other investigational drug candidates.

Food and Drug Administration, or FDA, that we are not currently distributing, marketing or selling.

In September 2019, we announced the completion of a strategic review of our business, as a result of which we refocused our resources on our immuno-inflammatory development programs.

We are pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize our drug candidates and ESKATA (hydrogen peroxide) topical solution, 40% (w/w), or ESKATA, our non-marketed FDA-approved product.

ATI-450, an Investigational Oral MK2 Inhibitor

We submitted an Investigational New Drug Application, or IND, in April 2019 for ATI-450, an investigational oral, novel, small molecule selective mitogen-activated protein kinase-activated protein kinase 2, or MK2, inhibitor compound, for the treatment of rheumatoid arthritis, which was allowed by the FDA in May 2019.

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Following the completion of the Phase 1 clinical trial, in March 2020 we initiated a Phase 2a clinical trial to investigate the safety, tolerability, pharmacokinetics and pharmacodynamics of ATI-450 in subjects with moderate to severe rheumatoid arthritis.

Our planned enrollment for this trial is up to 25 subjects.

Due to the COVID-19 pandemic, we temporarily paused enrollment.

We resumed enrolling subjects, and the first subject was dosed, in May 2020.

At this time, we are actively recruiting for this trial.

Given the continuing evolution of the COVID-19 pandemic, we now anticipate reporting data from this trial in the first half of 2021.

We are also planning to initiate a Phase 2a clinical trial of ATI-450 in cryopyrin-associated periodic syndrome (CAPS), an Ilβ-driven disease, in the second half of 2020.

We are also supporting an investigator-initiated Phase 2a, randomized, double-blind, placebo-controlled clinical trial to investigate the safety and efficacy of ATI-450, when used in addition to standard of care therapy, as a potential treatment for cytokine release syndrome in 36 hospitalized patients with COVID-19.

continuing evolution of the COVID-19 pandemic, we modified our anticipated timing for reporting data from this trial to the first half of 2021.

In November 2020, we initiated a Phase 2a open-label, single-arm clinical trial to investigate the safety, tolerability, efficacy and pharmacodynamics of ATI-450 for the maintenance of remission in subjects with cryopyrin-associated periodic syndrome, or CAPS, previously managed with anti-IL1 therapy.

Our planned enrollment for this trial is up to 10 subjects.

In November 2020, we filed for orphan drug designation for this indication.

The primary endpoint in this trial is the proportion of subjects who are free from respiratory failure by day 14.

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The first subject was dosed in August 2020.

We submitted an IND in June 2020 for ATI-1777, an investigational topical “soft” Janus kinase, or JAK, 1/3 inhibitor compound, for the treatment of moderate to severe atopic dermatitis, and now plan to progress to the first-in-human trial of ATI-1777 in subjects with moderate to severe atopic dermatitis.

ATI-1777, an Investigational Topical “Soft” JAK 1/3 Inhibitor

In June 2020, we submitted an IND for ATI-1777, an investigational topical “soft” Janus kinase, or JAK, 1/3 inhibitor compound, for the treatment of moderate to severe atopic dermatitis.

“Soft” JAK inhibitors are designed to be topically applied and active in the skin, but rapidly metabolized and inactivated when they enter the bloodstream, which may result in low systemic exposure.

We expect to initiate a Phase 1/2a multicenter, randomized, double-blind, vehicle-controlled trial to investigate the safety, tolerability, pharmacokinetics and efficacy of topically applied ATI-1777 in subjects with moderate to severe atopic dermatitis in the second half of 2020.

The primary endpoint will assess efficacy at four weeks.

In October 2020, we initiated a Phase 2a multicenter, randomized, double-blind, vehicle-controlled, parallel-group clinical trial to investigate the efficacy, safety, tolerability and pharmacokinetics of ATI-1777 in subjects with moderate or severe atopic dermatitis.

Our planned enrollment for this trial is approximately 42 subjects.

The first subject was dosed in October 2020.

ATI-2138, an Investigational ITJ Inhibitor

We are developing ATI-2138, an investigational oral ITK/TXK/JAK3, or ITJ, inhibitor compound, as a potential treatment for psoriasis and/or inflammatory bowel disease, which are both T-cell mediated autoimmune diseases.

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We expect to file an IND for ATI-2138 in 2021.

Other Drug Candidates and Non-Marketed FDA-Approved Product

We are pursuing strategic alternatives, including seeking a partner, to further develop, obtain regulatory approval and/or commercialize, as applicable, our drug candidate A-101 45% Topical Solution as a potential treatment for common warts, as well as ATI-501 and ATI-502, our other JAK inhibitor candidates, as potential treatments for alopecia, and ESKATA, our non-marketed FDA-approved product.

Financial Overview

Since our inception, we have incurred significant operating losses.

Our net loss was $27.2 million for the six months ended June 30, 2020 and $161.4 million for the year ended December 31, 2019.

As of June 30, 2020, we had an accumulated deficit of $480.7 million.

Our net loss was $37.8 million for the nine months ended September 30, 2020 and $161.4 million for the year ended December 31, 2019.

As of September 30, 2020, we had an accumulated deficit of $491.4 million.

We expect to incur significant expenses and operating losses for the foreseeable future as we advance our drug candidates from discovery through preclinical and clinical development.

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We may also not be successful in pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize our drug candidates or ESKATA.

Furthermore, we have incurred and expect to continue to incur significant costs associated with operating as a public company, including legal, accounting, investor relations and other expenses.

Furthermore, we have incurred and expect to continue to incur significant costs associated with

operating as a public company, including legal, accounting, investor relations and other expenses.

As a result, we will need substantial additional funding to support our continuing operations.

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The global outbreak of COVID-19 continues to rapidly evolve.

We have implemented a virtual operations strategy, including telecommuting and other alternative work arrangements for our employees, intended to protect the health and safety of our employees while enabling us to continue to develop our pipeline of drug candidates and provide contract research services to our clients.

We have implemented a virtual operations strategy, including teleworking and other alternative work arrangements for our employees, intended to protect the health and safety of our employees while enabling us to continue to develop our pipeline of drug candidates and provide contract research services to our clients.

We are focused on ensuring the continuity of our operations.

In March 2020, we

initiated a Phase 2a clinical trial of ATI-450 as a potential treatment for moderate to severe rheumatoid arthritis.

In March 2020, we initiated a Phase 2a clinical trial of ATI-450 as a potential treatment for moderate to severe rheumatoid arthritis.

Due to the COVID-19 pandemic, we temporarily paused enrollment.

We resumed enrolling subjects, and the first subject was dosed, in May 2020.

At this time, we are actively recruiting for this trial.

Given the continuing evolution of the COVID-19 pandemic, we now anticipate reporting data from this trial in the first half of 2021.

Given the continuing evolution of the COVID-19 pandemic, we modified our anticipated timing for reporting data from this trial to the first half of 2021.

If COVID-19 continues to spread, we may experience additional disruptions that could severely impact our business, results of operations and prospects, including the timing of our development programs and our clinical trials, including our trials of ATI-450 as a potential treatment for rheumatoid arthritis and CAPS and our trial of ATI-1777 as a potential treatment for moderate to severe atopic dermatitis.

The extent to which the COVID-19 pandemic impacts our business, our preclinical and clinical development and our regulatory efforts will depend on future developments that are highly uncertain and cannot be predicted, such as the geographic spread of the disease, the duration of the outbreak, travel restrictions, quarantines, stay-at-home orders, social distancing requirements, business closures and supply chain and other disruptions in the United States and other countries, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.

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These expenses primarily include:

● expenses incurred under agreements with contract research organizations, or CROs, as well as investigative sites and consultants that conduct our clinical trials and preclinical studies;

● expenses incurred under agreements with contract research organizations, or CROs, as well as investigative sites and consultants that conduct our clinical trials and preclinical studies, and investigator-initiated trials;

● manufacturing scale-up expenses and the cost of acquiring and manufacturing active pharmaceutical ingredients and preclinical and clinical trial materials;

● outsourced professional scientific development services;

● medical affairs expenses related to our drug candidates, including investigator-initiated studies;

● medical affairs expenses related to our drug candidates;

● employee-related expenses, which include salaries, benefits and stock-based compensation;

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Drug candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.

We expect to continue to incur research and development expenses in the near term as we continue the clinical development of ATI-450 as a potential treatment for rheumatoid arthritis and other immuno-inflammatory diseases and ATI-1777 as a potential treatment for moderate to severe atopic dermatitis, continue the development of our preclinical compounds, and continue to identify, research and develop additional drug candidates.

We expect to continue to incur research and development expenses in the near term as we continue the clinical development of ATI-450 as a potential treatment for rheumatoid arthritis, CAPS and other immuno-inflammatory diseases and ATI-1777 as a potential treatment for moderate to severe atopic dermatitis, continue the development of our preclinical compounds, and continue to identify, research and develop additional drug candidates.

We expense research and development costs as incurred.

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● the number of doses subjects receive;

● the impact on the timing of our clinical trials due to the COVID-19 pandemic;

● the impact on the recruitment, enrollment, conduct and timing of our clinical trials due to the COVID-19 pandemic;

● the duration of subject follow-up;

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A change in the outcome of any of these variables with respect to the development of a drug candidate could mean a significant change in the costs and timing associated with the development of that drug candidate.

For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate,

or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive, administrative, finance, investor relations and legal functions, including stock-based compensation and travel expenses.

General and administrative expenses also include facility-related costs, patent filing and prosecution costs, professional fees for legal, auditing and tax services, and insurance costs.

General and administrative expenses consist principally of salaries and related costs for personnel in executive, administrative, finance and legal functions, including stock-based compensation and travel expenses.

General and administrative expenses also include facility-related costs, patent filing and prosecution costs, professional fees for legal, auditing and tax services, investor relations costs and insurance costs.

We anticipate that we will incur increased director and officer insurance premiums and legal expenses associated with defending the current lawsuits described in this report.

Other Income (Expense), Net

Other income (expense), net primarily consists of interest earned on our cash, cash equivalents and marketable securities, interest expense related to our debt obligations and finance leases, and gains and losses on transactions denominated in foreign currencies.

Other Expense, Net

Other expense, net primarily consists of interest earned on our cash, cash equivalents and marketable securities, interest expense related to our debt obligations and finance leases, and gains and losses on transactions denominated in foreign currencies.

Critical Accounting Policies and Significant Judgments and Estimates

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Revenue related to laboratory services is generally recognized as the laboratory services are performed, based upon the rates specified in the contracts.

Under ASC Topic 606, we elected to apply the “right to invoice” practical expedient when recognizing contract research revenue.

We recognize contract research revenue in the amount to which we have the right to invoice.

Under ASC Topic 606, we elected to apply the “right to invoice” practical

expedient when recognizing contract research revenue and as such, recognize revenue in the amount which we have the right to invoice.

ASC Topic 606 also provides an optional exemption, which we have elected to apply, from disclosing remaining performance obligations when revenue is recognized from the satisfaction of the performance obligation in accordance with the “right to invoice” practical expedient.

Intangible Assets

Our intangible assets include both definite-lived and indefinite-lived assets.

Our definite-lived intangible assets consist of a drug discovery technology platform acquired through the acquisition of Confluence.

Definite-lived intangible assets are amortized over their estimated useful life based on the pattern over which the intangible assets are consumed or otherwise used up.

If that pattern cannot be reliably determined, the straight-line method of amortization is used.

Our definite-lived intangible assets consist of a research technology platform acquired through the acquisition of Confluence.

Our indefinite-lived intangible assets consist of an in-process research and development, or IPR&D, drug candidate also acquired through the acquisition of Confluence.

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Definite-lived intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

Indefinite-lived intangible assets are tested for impairment at least

annually, which we perform during the fourth quarter, or when indicators of an impairment are present.

Indefinite-lived intangible assets are tested for impairment at least annually, which we perform during the fourth quarter, or when indicators of an impairment are present.

We recognize impairment losses when and to the extent that the estimated fair value of an intangible asset is less than its carrying value.

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Contingent Consideration

We initially recorded a contingent consideration liability related to future potential payments based upon the achievement of certain development, regulatory and commercial milestones, as well as future projected sales performance, resulting from the acquisition of Confluence, at its estimated fair value on the date of acquisition.

The ultimate amount of future payments, if any, is based on criteria such as sales performance and the achievement of certain regulatory and sales milestones.

We initially recorded a contingent consideration liability related to future potential payments resulting from the acquisition of Confluence based upon the achievement of certain development, regulatory and commercial milestones, as well as future projected sales performance, at its estimated fair value on the date of acquisition.

The ultimate amount of

future payments, if any, is based on criteria such as sales performance and the achievement of certain regulatory and sales milestones.

We estimate the fair value of the contingent consideration liability related to the achievement of regulatory milestones by assigning an achievement probability to each potential milestone and discounting the associated cash payment to its present value using a risk-adjusted rate of return.

We estimate the fair value of the contingent consideration liability associated with sales milestones and royalties by estimating future sales levels, assigning an achievement probability and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate.

Significant assumptions used in our estimates include the probability of success of achieving regulatory and sales milestones, which are based upon an asset’s current stage of development and ranged between 4% and 15%.

Significant assumptions used in our estimates include the probability of success of both achieving regulatory milestones and commencing commercialization, which are based upon an asset’s current stage of development and ranged between 4% and 15%.

We evaluate fair value estimates of contingent consideration liabilities on a periodic basis.

Any change in fair value reflects new information about the likelihood of the payment of the contingent consideration and the passage of time.

For example, if the timing of the development of an acquired drug candidate, or the size of potential commercial opportunities related to an acquired drug, differ from our assumptions, then the fair value of contingent consideration would be adjusted accordingly.

For example, if the timing of the development of an acquired drug candidate, or the size of potential commercial opportunities related to an acquired drug candidate, differ from our assumptions, then the fair value of contingent consideration would be adjusted accordingly.

Future changes in the fair value of the contingent consideration, if any, will be recorded as income or expense in our condensed consolidated statement of operations.

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In November 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2018-18, Collaborative Arrangements (Topic 808):

Clarifying the Interaction Between Topic 808 and Topic 606,

which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

Clarifying the Interaction Between Topic 808 and Topic 606, which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606.

We adopted this standard as of January 1, 2020, the impact of which on our consolidated financial statements was not significant.

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ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification, or ASC, 350-40 to determine which implementation costs to capitalize as assets or expense as incurred.

The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years.

We adopted this standard as of January 1, 2020, the impact of which on our consolidated financial statements was not significant.

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This update eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some of the existing disclosure requirements.

The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years.

We adopted this standard as of January 1, 2020, the impact of which on our consolidated financial statements was not significant.

Results of Operations

Comparison of Three Months Ended June 30, 2020 and 2019

Three Months Ended June 30,

Comparison of Three Months Ended September 30, 2020 and 2019

Three Months Ended September 30,

(In thousands)

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General and administrative

Goodwill impairment

Total costs and expenses

Loss from operations

Other income (expense), net

Other expense, net

Loss from continuing operations

Loss from discontinued operations

Contract research revenue was $1.9 million and $0.9 million for the three months ended June 30, 2020 and 2019, respectively, and was comprised primarily of fees earned from the provision of laboratory services to clients through Confluence.

Other revenue consisted of $0.2 million of royalties earned on net sales of RHOFADE (oxymetazoline hydrochloride) cream, 1%, or RHOFADE, pursuant to the asset purchase agreement with EPI Health, LLC, or EPI Health.

Contract research revenue was $1.3 million and $1.0 million for the three months ended September 30, 2020 and 2019, respectively, and was comprised primarily of fees earned from the provision of laboratory services to clients through Confluence.

Other revenue for the three months ended September 30, 2020 consisted of $0.1 million of royalties earned on net sales of RHOFADE (oxymetazoline hydrochloride) cream, 1%, or RHOFADE, pursuant to the asset purchase agreement with EPI Health, LLC, or EPI Health.

Cost of Revenue

Cost of revenue was $1.4 million and $1.0 million for the three months ended June 30, 2020 and 2019, respectively, and related to providing laboratory services to our clients through Confluence.

Cost of revenue was $1.2 million and $0.8 million for the three months ended September 30, 2020 and 2019, respectively, and related to providing laboratory services to our clients through Confluence.

Research and Development Expenses

1 unchanged sentence

Three Months Ended

September 30,

(In thousands)

4 unchanged sentences

Stock-based compensation

Development milestone

Change in contingent consideration

Total research and development expenses

Research and development expenses for ATI-450 primarily consisted of preclinical development activities during the three months ended June 30, 2019 and initial activities for a Phase 2a clinical trial during the three months ended June 30, 2020.

Expenses for ATI-1777 were higher during the three months ended June 30, 2020 primarily due to initial activities related to a Phase 1/2a clinical trial which we expect to initiate in the second half of 2020.

Expenses for ATI-2138 were higher primarily due to preclinical development activities during the three months ended June 30, 2020.

Expenses related to our other JAK inhibitors decreased primarily as a result of the completion of several Phase 2 clinical trials of ATI-501 and ATI-502 during 2019.

Research and development expenses for ATI-450 during the three months ended September 30, 2019 primarily consisted of preclinical development activities and activities related to a Phase 1 clinical trial that was completed in January 2020.

ATI-450 expenses during the three months ended September 30, 2020 primarily consisted of costs associated with multiple clinical trials, including a Phase 2a trial in subjects with rheumatoid arthritis.

Expenses for ATI-1777 were higher during the three months ended September 30, 2020 due to initial activities related to a Phase 2a clinical trial which began enrollment in October 2020.

Expenses for ATI-2138 were higher during the three months ended September 30, 2020 primarily due to preclinical development activities to support an IND submission.

Expenses related to other JAK inhibitors decreased primarily as a result of the completion of several Phase 2 clinical trials of ATI-501 and ATI-502 during 2019.

Expenses related to A-101 45% Topical Solution decreased primarily due to the completion of our Phase 3 clinical trials during 2019.

Other research and development expenses, which primarily included expenses for medical affairs activities as well as drug discovery, were lower primarily as a result of lower medical affairs related activities during the three months ended June 30, 2020 primarily resulting from our clinical trials that were completed during 2019 for A-101 45% Topical Solution, ATI-501 and ATI-502.

Personnel expenses and stock-based compensation decreased due to lower headcount primarily as a result of the restructuring we announced in September 2019.

The change in contingent consideration during the three months ended June 30, 2019 was the result of updates to our assumptions as a result of the filing of an IND for ATI-450.

In September 2019, we made a milestone payment of $4.0 million to Rigel Pharmaceuticals, Inc., or Rigel, upon the achievement of a development milestone.

The change in contingent consideration during the three months ended September 30, 2020 was the result of updates to our assumptions as a result of the submission and allowance of an IND for ATI-1777.

General and Administrative Expenses

1 unchanged sentence

Three Months Ended

September 30,

(In thousands)

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Total general and administrative expenses

Personnel and stock-based compensation expenses decreased primarily due to lower headcount.

Professional and legal fees included accounting, legal, investor relations and corporate communication costs, as well as legal fees related to patents and current lawsuits described in this report, and were lower year-over-year primarily as a result of lower legal fees.

Personnel and stock-based compensation expenses decreased primarily due to lower headcount primarily as a result of the restructuring we announced in September 2019.

Professional and legal fees included accounting, legal, investor relations and corporate communication costs, as well as legal fees related to patents and current lawsuits described in this report, and were higher primarily as a result of higher legal and accounting fees.

Facility and support services included general office expenses, information technology costs and other expenses, and have decreased primarily due to lower information technology costs resulting from lower headcount.

Other general and

administrative expenses included travel, insurance and marketing costs, and were lower primarily due to reduced travel-related activities in light of the COVID-19 pandemic.

Goodwill Impairment

During the three months ended June 30, 2019, we performed an interim impairment analysis due to a decline in our stock price.

Our impairment analysis noted that our stock price, including a reasonable control premium, resulted in a fair value for the therapeutics reporting unit which was less than its carrying value.

As a result, we recorded a goodwill impairment charge of $18.5 million writing off the full balance of goodwill.

Other Income (Expense), net

Other expense, net for the three months ended June 30, 2020 was $0.2 million and primarily included interest expense related to our term loan facility with Silicon Valley Bank, or SVB, which we borrowed in March 2020, as well as interest on our finance leases, partially offset by interest income earned on our cash and investments.

Other expense, net for the three months ended June 30, 2019 was $0.1 million and primarily included interest expense incurred on our debt with Oxford Finance LLC, which we borrowed in October 2018 and repaid in full in October 2019, partially offset by interest income earned on our cash and investments.

Other general and administrative expenses included

travel and insurance costs, and were lower primarily due to reduced travel-related activities in light of the COVID-19 pandemic.

Other Expense, net

Other expense, net for the three months ended September 30, 2020 was $0.2 million and primarily included interest expense related to our term loan facility with Silicon Valley Bank, or SVB, which we borrowed in March 2020, as well as interest on our finance leases, partially offset by interest income earned on our cash and investments.

Other expense, net for the three months ended September 30, 2019 was $0.3 million and primarily included interest expense incurred on our debt with Oxford Finance LLC, which we borrowed in October 2018 and repaid in full in October 2019, partially offset by interest income earned on our cash and investments.

Loss from Discontinued Operations

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The condensed consolidated financial statements have been recast for all periods presented to reflect the assets, liabilities, revenue and expenses related to our commercial products as discontinued operations (see Note 15 to the condensed consolidated financial statements included in this report for additional information).

Comparison of Six Months Ended June 30, 2020 and 2019

Six Months Ended June 30,

Comparison of Nine Months Ended September 30, 2020 and 2019

Nine Months Ended September 30,

(In thousands)

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Loss from operations

Other income (expense), net

Other expense, net

Loss from continuing operations

Loss from discontinued operations

Contract research revenue was $3.0 million and $2.1 million for the six months ended June 30, 2020 and 2019, respectively, and was comprised primarily of fees earned from the provision of laboratory services to clients through Confluence.

Other revenue consisted of $0.4 million of royalties earned on net sales of RHOFADE pursuant to the asset purchase agreement with EPI Health.

Contract research revenue was $4.4 million and $3.1 million for the nine months ended September 30, 2020 and 2019, respectively, and was comprised primarily of fees earned from the provision of laboratory services to clients through Confluence.

Other revenue during the nine months ended September 30, 2020 consisted of $0.5 million of royalties earned on net sales of RHOFADE pursuant to the asset purchase agreement with EPI Health.

Cost of Revenue

Cost of revenue was $2.7 million and $2.2 million for the six months ended June 30, 2020 and 2019, respectively, and related to providing laboratory services to our clients through Confluence.

Cost of revenue was $3.8 million and $3.0 million for the nine months ended September 30, 2020 and 2019, respectively, and related to providing laboratory services to our clients through Confluence.

Research and Development Expenses

The following table summarizes our research and development expenses:

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

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Stock-based compensation

Development milestone

Change in contingent consideration

Total research and development expenses

Research and development expenses for ATI-450 during the six months ended June 30, 2019 primarily consisted of preclinical development activities and activities related to a Phase 1 clinical trial that was completed in January 2020.

Research and development expenses for ATI-450 during the six months ended June 30, 2020 primarily consisted of initial activities for a Phase 2a clinical trial.

Expenses for ATI-1777 were lower primarily due to the completion of preclinical development activities.

Expenses for ATI-2138 were comparable period over period as we completed early stage development work on candidate selection in 2019 and began preclinical development activities during the six months ended June 30, 2020.

Expenses related to our other JAK inhibitors decreased primarily as a result of the completion of several Phase 2 clinical trials of ATI-501 and ATI-502 during 2019.

Research and development expenses for ATI-450 during the nine months ended September 30, 2019 primarily consisted of preclinical development activities and activities related to a Phase 1 clinical trial that was completed in January 2020.

ATI-450 expenses during the nine months ended September 30, 2020 primarily consisted of costs associated with multiple clinical trials, including a Phase 2a trial in subjects with rheumatoid arthritis.

ATI-450 expenses decreased during the nine months ended September 30, 2020 due to lower preclinical development activities, partially offset by an increase in costs associated with various ongoing clinical trials.

Expenses for ATI-1777 were lower during the nine months ended September 30, 2020 primarily due to the completion of preclinical development activities, partially offset by costs associated with initial activities related to a Phase 2a clinical trial which began enrollment in October 2020.

Expenses for ATI-2138 were higher during the nine months ended September 30, 2020 primarily due to preclinical development activities to support an IND submission.

Expenses related to other JAK inhibitors decreased primarily as a result of the completion of several Phase 2 clinical trials of ATI-501 and ATI-502 during 2019.

Expenses related to A-101 45% Topical Solution decreased primarily due to the completion of our Phase 3 clinical trials during 2019.

Other research and development expenses, which primarily included expenses for medical affairs activities as well as drug discovery, were lower primarily as a result of lower medical affairs related activities during the six months ended June 30, 2020 primarily resulting from our clinical trials that were completed during 2019 for A-101 45% Topical Solution, ATI-501 and ATI-502.

Other research and development expenses, which primarily included expenses for medical affairs activities as well as drug discovery, were lower primarily as a result of lower medical affairs related activities during the nine months ended September 30, 2020 primarily resulting from our clinical trials that were completed during 2019 for A-101 45% Topical Solution, ATI-501 and ATI-502.

Personnel expenses and stock-based compensation decreased due to lower headcount primarily as a result of the restructuring we announced in September 2019.

The change in contingent consideration during the six months ended June 30, 2020 was the result of updates to our assumptions as a result of the completion of a successful Phase 1 clinical trial for ATI-450, while the change in contingent consideration during the six months ended June 30, 2019 was the result of updates to our assumptions as a result of the filing of an IND for ATI-450.

In September 2019, we made a milestone payment of $4.0 million to Rigel upon the achievement of a development milestone.

The change in contingent consideration during the nine months ended September 30, 2020 was the result of updates to our assumptions as a result of the completion of a successful Phase 1 clinical trial for ATI-450 and the submission of an IND for ATI-1777, while the change in contingent consideration during the nine months ended September 30, 2019 was the result of updates to our assumptions as a result of the submission and allowance of an IND for ATI-450.

General and Administrative Expenses

The following table summarizes our general and administrative expenses:

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

5 unchanged sentences

Total general and administrative expenses

Personnel and stock-based compensation expenses decreased primarily due to lower headcount.

Personnel and stock-based compensation expenses decreased primarily due to lower headcount primarily as a result of the restructuring we announced in September 2019.

Other general and administrative expenses included travel, insurance and marketing costs, and were lower primarily due to reduced travel-related activities in light of the COVID-19 pandemic.

Other general and administrative expenses included travel and insurance costs, and were lower primarily due to reduced travel-related activities in light of the COVID-19 pandemic.

Goodwill Impairment

During the six months ended June 30, 2019, we performed an interim impairment analysis due to a decline in our stock price.

During the nine months ended September 30, 2019, we performed an interim impairment analysis due to a decline in our stock price.

Our impairment analysis noted that our stock price, including a reasonable control premium, resulted in a fair value for the therapeutics reporting unit which was less than its carrying value.

As a result, we recorded a goodwill impairment charge of $18.5 million writing off the full balance of goodwill.

Other Income (Expense), net

Other expense, net for the six months ended June 30, 2020 was $11,000 and primarily included interest expense related to our term loan facility with SVB which we borrowed in March 2020, as well as interest on our finance leases, substantially offset by interest income earned on our cash and investments.

Other expense, net for the six months ended June 30, 2019 was $0.3 million and primarily included interest expense incurred on our debt with Oxford Finance LLC,

which we borrowed in October 2018 and repaid in full in October 2019, partially offset by interest income earned on our cash and investments.

Other Expense, net

Other expense, net for the nine months ended September 30, 2020 was $0.2 million and primarily included interest expense related to our term loan facility with SVB which we borrowed in March 2020, as well as interest on our finance leases, partially offset by interest income earned on our cash and investments.

Other expense, net for the nine months ended September 30, 2019 was $0.6 million and primarily included interest expense incurred on our debt with Oxford Finance LLC, which we borrowed in October 2018 and repaid in full in October 2019, partially offset by interest income earned on our cash and investments.

Loss from Discontinued Operations

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In March 2020, we entered into the Loan and Security Agreement with SVB.

As of June 30, 2020, we had cash, cash equivalents and restricted cash and marketable securities of $68.1 million.

In August 2020, we entered into an equity purchase agreement with Lincoln Park Capital Fund, LLC, or Lincoln Park .

As of September 30, 2020, we had cash, cash equivalents, restricted cash and marketable securities of $55.2 million.

Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view towards liquidity and capital preservation.

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The Loan and Security Agreement includes a final payment fee equal to 5% of the original principal amount borrowed.

We have the option to prepay the outstanding balance of the term loans in full, subject to a prepayment premium of (i) 3% of the original principal amount borrowed for any prepayment on or prior to the first anniversary of March 30, 2020, (ii) 2% of the original principal amount borrowed for any prepayment after the first anniversary and on or before the second anniversary of March 30, 2020 or (iii) 1% of the original principal amount borrowed for any prepayment after the second anniversary of March 30, 2020 but before March 1, 2024.

The Loan and Security Agreement contains a customary covenant that limits our ability, subject to specified exceptions, to incur additional indebtedness without the prior consent of SVB.

the second anniversary of March 30, 2020 or (iii) 1% of the original principal amount borrowed for any prepayment after the second anniversary of March 30, 2020 but before March 1, 2024.

The Loan and Security Agreement contains a customary covenant that limits our ability, subject to specified exceptions, to incur additional indebtedness without the prior written consent of SVB.

Equity Purchase Agreement with Lincoln Park Capital Fund, LLC

In August 2020, we entered into a purchase agreement, or the Purchase Agreement, with Lincoln Park which provides that, upon the terms and subject to the conditions and limitations set forth therein, we may sell to Lincoln Park, at our discretion, up to $15.0 million of shares of our common stock over the 36-month term of the Purchase Agreement.

U pon execution of the Purchase Agreement, we issued 121,584 shares of our common stock to Lincoln Park as commitment shares in accordance with the closing conditions contained within the Purchase Agreement.

The commitment shares were valued using the closing price of our common stock on the effective date of the Purchase Agreement resulting in an aggregate fair value of $0.3 million.

As of September 30, 2020, we had not sold any shares of our common stock to Lincoln Park under the Purchase Agreement.

The following table summarizes our cash flows for each of the periods presented:

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

Net cash used in operating activities

Net cash provided by (used in) investing activities

Net cash provided by investing activities

Net cash provided by (used in) financing activities

Net decrease in cash and cash equivalents

Net decrease in cash, cash equivalents and restricted cash

Operating Activities

During the six months ended June 30, 2020, operating activities used $17.6 million of cash primarily resulting from our net loss of $27.2 million, partially offset by non-cash adjustments of $9.7 million.

Net cash used by changes in our operating assets and liabilities during the six months ended June 30, 2020 consisted of a $5.9 million net decrease in accounts payable and accrued expenses, which were partially offset by a $4.9 million decrease in accounts receivable and a $0.9 million decrease in prepaid expenses and other assets.

During the nine months ended September 30, 2020, operating activities used $29.8 million of cash primarily resulting from our net loss of $37.8 million, partially offset by non-cash adjustments of $12.9 million.

Net cash used by changes in our operating assets and liabilities during the nine months ended September 30, 2020 consisted of a $10.9 million net decrease in accounts payable and accrued expenses, which were partially offset by a $4.8 million decrease in accounts receivable and a $1.3 million decrease in prepaid expenses and other assets.

The net decrease in accounts payable and accrued expenses was primarily driven by expenses incurred, but not yet paid, as of December 31, 2019.

The decrease in accounts receivable was primarily the result of cash received from Allergan Sales, LLC, or Allergan, related to sales of RHOFADE made during the year ended December 31, 2019.

The decrease in prepaid expenses and other assets was primarily due to amortization of the premiums for our corporate insurance policies, which we expense equally over the policy term.

The net decrease in accounts payable and accrued expenses was primarily driven by expenses incurred, but not yet paid, as of December 31, 2019, which were partially offset by cash received from Allergan which related to sales of RHOFADE that occurred after the date we sold RHOFADE to EPI Health.

Accordingly, we had $4.9 million payable to EPI Health as of June 30, 2020, which is included in accrued expenses on our condensed consolidated balance sheet.

Expenses incurred, as of December 31, 2019, and paid during the six months ended June 30, 2020, primarily included employee annual merit bonuses, as well as expenses related to preclinical development and Phase 1 clinical trial activities for ATI-450, and preclinical development activities for ATI-1777 and ATI-2138.

Expenses incurred as of December 31, 2019 and paid during the nine months ended September 30, 2020 primarily included employee annual merit bonuses, as well as expenses related to preclinical development and Phase 1 clinical trial activities for ATI-450, and preclinical development activities for ATI-1777 and ATI-2138.

Non-cash expenses of $12.9 million were composed of stock-based compensation expense of $8.7 million, a charge of $2.4 million related to the change in contingent consideration and depreciation and amortization expense of $1.8 million.

During the six months ended June 30, 2019, operating activities used $52.7 million of cash primarily resulting from our net loss of $87.4 million, partially offset by non-cash adjustments of $33.4 million.

Net cash provided by changes in our operating assets and liabilities during the six months ended June 30, 2019 consisted of a $13.3 million increase in accounts payable and accrued expenses and a $2.9 million decrease in prepaid expenses and other assets, which were partially offset by a $14.5 million increase in accounts receivable.

The increase in accounts payable and accrued expenses was primarily driven by expenses incurred, but not yet paid, as of June 30, 2019, as well as the timing of vendor invoicing and payments.

Expenses incurred, but not yet paid, as of June 30, 2019 primarily included sales discounts and allowances related to sales of RHOFADE, as well as expenses related to our Phase 3 clinical trials for A-101 45% Topical Solution, our Phase 2 clinical trials for ATI-501 and ATI-502 and preclinical development activities for ATI-450.

The decrease in prepaid expenses and other assets was due to research and development activities primarily related to preclinical development activities for ATI-450 and ATI-502 which concluded during the six months ended June 30, 2019 and sales and marketing expenses related to our national sales meeting which was held during the six months ended June 30, 2019.

The increase in accounts receivable was primarily the result of sales of RHOFADE.

Non-cash expenses of $33.4 million were composed of a goodwill impairment charge of $18.5 million, stock-based compensation expense of $9.7 million, a charge of $0.7 million related to the change in contingent consideration and depreciation and amortization expense of $4.5 million.

During the nine months ended September 30, 2019, operating activities used $76.1 million of cash primarily resulting from our net loss of $142.8 million, partially offset by non-cash adjustments of $66.0 million.

Net cash provided by changes in our operating assets and liabilities during the nine months ended September 30, 2019 consisted of a $9.9 million increase in accounts payable and accrued expenses and a $3.9 million decrease in prepaid expenses and other assets, which were partially offset by a $13.0 million increase in accounts receivable.

The increase in accounts payable and accrued expenses was primarily driven by expenses incurred, but not yet paid, as of September 30, 2019, as well as the timing of vendor invoicing and payments.

Expenses incurred, but not yet paid, as of September 30, 2019 primarily included sales discounts and allowances related to sales of RHOFADE, as well as expenses related to our Phase 3 clinical trials for A-101 45% Topical Solution, our Phase 2 clinical trials for ATI-501 and ATI-502 and preclinical development

and Phase 1 clinical trial activities for ATI-450.

The decrease in prepaid expenses and other assets was due to research and development activities primarily related to preclinical development activities for ATI-450 and ATI-502 which concluded during the nine months ended September 30, 2019, and reduced sales and marketing activities related to our decision to no longer use a sales force to promote RHOFADE in September 2019.

In addition, because the annual renewal of our corporate insurance policies occurred in October 2019, the balance of prepaid insurance was minimal as of September 30, 2019.

The increase in accounts receivable was primarily the result of sales of RHOFADE during the nine months ended September 2019.

Non-cash expenses of $66.0 million were composed of an intangible asset impairment charge of $27.6 million, a goodwill impairment charge of $18.5 million, stock-based compensation expense of $13.0 million, a charge of $0.7 million related to the change in contingent consideration and depreciation and amortization expense of $6.1 million.

Investing Activities

During the six months ended June 30, 2020, investing activities provided $3.5 million of cash, consisting of proceeds from sales and maturities of marketable securities of $30.7 million, partially offset by purchases of marketable securities of $27.1 million, and purchases of equipment of $0.1 million.

During the six months ended June 30, 2019, investing activities provided $27.6 million of cash, consisting of proceeds from sales and maturities of marketable securities of $117.5 million, partially offset by purchases of marketable securities of $89.4 million, and purchases of equipment of $0.5 million.

During the nine months ended September 30, 2020, investing activities provided $8.7 million of cash, consisting of proceeds from sales and maturities of marketable securities of $49.0 million, offset by purchases of marketable securities of $39.9 million and purchases of equipment of $0.4 million.

During the nine months ended September 30, 2019, investing activities provided $49.2 million of cash, consisting of proceeds from sales and maturities of marketable securities of $171.9 million, offset by purchases of marketable securities of $121.3 million and purchases of equipment of $1.3 million.

Financing Activities

During the six months ended June 30, 2020, financing activities provided $10.8 million of cash and consisted of $10.9 million of net borrowings pursuant to the Loan and Security Agreement with SVB offset by $0.1 million of finance lease payments.

During the six months ended June 30, 2019, financing activities used $0.2 million of cash primarily related to finance lease payments.

During the nine months ended September 30, 2020, financing activities provided $10.5 million of cash and consisted of $10.9 million of net borrowings pursuant to the Loan and Security Agreement with SVB offset by $0.1 million of finance lease payments and $0.2 million of deferred issuance costs.

During the nine months ended September 30, 2019, financing activities used $0.3 million of cash primarily related to finance lease payments.

Funding Requirements

We anticipate we will incur net losses in the near term as we continue the clinical development of ATI-450 as a potential treatment for rheumatoid arthritis, other immuno-inflammatory diseases and COVID-19 and ATI-1777 as a potential treatment for moderate to severe atopic dermatitis, continue the development of our preclinical compounds, and continue to identify, research and develop additional drug candidates.

We anticipate we will incur net losses in the near term as we continue the clinical development of ATI-450 as a potential treatment for rheumatoid arthritis, CAPS and other immuno-inflammatory diseases and ATI-1777 as a potential treatment for moderate to severe atopic dermatitis, continue the development of our preclinical compounds, and continue to identify, research and develop additional drug candidates.

We may not be able to generate revenue from these programs if, among other things, our clinical trials are not successful, the FDA does not approve our drug candidates currently in clinical trials when we expect, or at all, or we are not able to identify and consummate transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates.

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We will require additional capital to complete the clinical development of ATI-450 and ATI-1777, to develop our preclinical compounds, and to support our discovery efforts.

Additional funds may not be available on a timely basis, on commercially acceptable terms, or at all, and such funds, if raised, may not be sufficient to enable us to continue to implement our long-term business strategy.

Additional funds may not be available on a

timely basis, on commercially acceptable terms, or at all, and such funds, if raised, may not be sufficient to enable us to continue to implement our long-term business strategy.

Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic.

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● the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;

● the impact on the timing of our preclinical studies and clinical trials and our business due to the COVID-19 pandemic;

● the impact on the timing of our preclinical studies, the recruitment, enrollment, conduct and timing of our clinical trials and our business due to the COVID-19 pandemic;

● our ability to identify and consummate transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates, and earn revenue from such arrangements;

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Further, we have agreed to pay up to an additional $10.5 million to Rigel upon the achievement of a second set of development milestones.

In addition, in connection with the amendment of the agreement in October 2019, we paid Rigel an amendment fee of $1.5 million in three installments of $500,000 in each of January 2020, April 2020 and July 2020.

In addition, in connection with the amendment of the agreement

in October 2019, we paid Rigel an amendment fee of $1.5 million in three installments of $0.5 million in each of January 2020, April 2020 and July 2020.

With respect to any products we commercialize under the agreement, we will pay Rigel quarterly tiered royalties on our annual net sales of each product developed using the licensed JAK inhibitors at a high single digit percentage of annual net sales, subject to specified reductions.

Under a stock purchase agreement with the selling stockholders of one of our former subsidiaries, we are obligated to make aggregate payments of up to $18.0 million upon the achievement of specified pre-commercialization milestones for three products covered by the acquired patent rights in the United States, the European Union and Japan, and aggregate payments of up to $22.5 million upon the achievement of specified commercial milestones for products covered by the acquired patent rights.

We are also obligated to make an annual payment of $0.1 million through March 2022, which

amounts are creditable against any specified future payments that may be paid under the agreement.

We are also obligated to make an annual payment of $0.1 million through March 2022, which amounts are creditable against any specified future payments that may be paid under the agreement.

With respect to any covered products that we commercialize under the agreement, we are obligated to pay a low single-digit percentage of annual net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such product.

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If we sell, license or transfer any of the intellectual property acquired pursuant to the agreement, we will be obligated to pay a portion of any consideration we receive from such sale, license or transfer in specified circumstances.

We enter into contracts in the normal course of business with CROs for clinical trials, preclinical research studies and testing, manufacturing and other services and products for operating purposes.

We enter into contracts in the normal course of business with CROs and contract manufacturing organizations for clinical trials, preclinical research studies and testing, manufacturing and other services and products for operating purposes.

These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis